AutoZone, Inc. — Q3 FY2017 Form 10-Q
Reporting period: Twelve weeks ended May 6, 2017; year-to-date figures cover 36 weeks. Fiscal 2017 ends August 26, 2017. AutoZone operates automotive parts retail and distribution locations, plus ALLDATA and e-commerce businesses; it does not provide vehicle repair or installation services. Results are unaudited interim figures and the company notes that its business is seasonal.
Financial performance
| Metric | Q3 FY2017 | Q3 FY2016 | 36 weeks FY2017 | 36 weeks FY2016 |
|---|---|---|---|---|
| Net sales | $2.619B | $2.594B | $7.376B | $7.237B |
| Gross profit / margin | $1.378B / 52.6% | $1.370B / 52.8% | $3.885B / 52.7% | $3.814B / 52.7% |
| Operating profit | $529.6M | $536.4M | $1.372B | $1.357B |
| Net income | $331.7M | $327.5M | $847.0M | $814.2M |
| Diluted EPS | $11.44 | $10.77 | $28.86 | $26.46 |
| Operating cash flow | Not presented separately by quarter | $1.009B | $1.095B |
Quarterly sales rose 1.0%, while diluted EPS rose 6.2%. Year-to-date sales increased 1.9% and diluted EPS increased 9.1%. Domestic same-store sales declined 0.8% in the quarter. Domestic commercial sales increased 3.6% in the quarter and 5.6% year to date.
Quarterly operating profit declined despite higher sales. Gross margin fell 20 basis points, with higher supply-chain costs from inventory initiatives and increased inventory shrink partly offset by lower acquisition costs. SG&A rose to 32.4% of sales from 32.2%, reflecting fixed-cost deleverage, self-insurance costs and wage pressure. Year-to-date gross margin was flat at 52.7%; SG&A increased to 34.1% of sales from 34.0%.
The effective tax rate declined to 32.8% from 34.8% for the quarter and to 33.3% from 35.1% year to date. Adoption of share-based compensation accounting guidance reduced the tax rate and increased diluted EPS by $0.32 for the quarter and $0.72 year to date. Share repurchases since the prior-year comparison period added an estimated $0.43 to quarterly diluted EPS and $0.92 year to date.
Liquidity, debt and capital allocation
- At May 6, 2017, cash was $227.1M; current assets were $4.507B and current liabilities $4.794B. Merchandise inventory was $3.861B.
- Long-term debt, net of discounts and issuance costs, was $5.153B, compared with $4.924B at August 27, 2016. Debt before those deductions was $5.178B, including $1.228B of commercial paper. The company had $1.997B of availability under its $2.0B revolving credit facilities and no borrowings under those facilities.
- Operating cash flow of $1.009B was below the prior-year $1.095B, primarily due to timing of accrued payments and increased inventory. Capital expenditures were $357.9M versus $299.9M. Approximate operating cash flow less capital expenditures was $651M, versus $795M in the prior-year period.
- Financing used $611.8M, including $844.2M of share repurchases. The company issued $600M of 3.750% notes due 2027 and repaid $400M of notes due January 2017. It repurchased 1.13M shares year to date; $1.051B remained authorized at period-end. After period-end, it repurchased a further 200,280 shares for $132.6M.
- Stockholders’ deficit was $1.714B. The adjusted debt-to-EBITDAR ratio was 2.6:1, unchanged from the prior-year comparison; trailing-four-quarter ROIC was 30.5%, down from 31.2%.
Outlook, commentary and risks
- No quantified full-year sales or earnings guidance is provided. Management expected FY2017 investment to exceed FY2016, directed mainly to new locations, supply-chain infrastructure, existing locations and technology. It opened 101 locations in the 36-week period.
- Management said delayed IRS tax refunds affected Q2 and continued into the first five weeks of Q3; the anticipated incremental Q3 sales benefit did not materialize. Gasoline prices increased only $0.06 per gallon during the quarter, versus $0.50 in the prior-year quarter. Management cited uncertainty around fuel prices, consumer spending, weather, foreign exchange, interest rates and other economic conditions.
- Inventory availability initiatives and more frequent deliveries increased inventory and supply-chain costs. Given difficulty generating sales benefits from more frequent restocking, the company began reducing delivery frequency to certain stores. Accounts payable were 107.2% of gross inventory, down from 110.9%, primarily due to slower inventory turns.
- Variable-rate debt was $1.228B; management estimated a 1 percentage-point interest-rate increase would reduce annual pretax earnings and cash flow by $12.3M. The company reported compliance with debt covenants and expected to remain compliant.
- Legal matters include California hazardous-waste and aftermarket-emissions proceedings, New Jersey groundwater remediation claims, and employment-related lawsuits. The company said it had accrued probable and estimable amounts where applicable and did not expect these matters to have a material adverse effect; outcomes remain uncertain.
- Management identified risks including demand, energy prices, weather, competition, financing access, employee hiring and retention, construction delays, cybersecurity, regulation and supplier costs. It reported no material change in risk factors from its FY2016 Form 10-K. Disclosure controls were deemed effective. The independent accountant performed an interim review, not an audit.
Most important facts for investors to verify
- Whether domestic same-store sales stabilize after the 0.8% quarterly decline, and whether commercial-sales growth continues.
- Whether inventory initiatives improve availability and sales enough to justify higher inventory, supply-chain costs and slower turns.
- How much of EPS growth reflects the lower tax rate from the newly adopted share-based-payment guidance and ongoing share repurchases.
- Debt, interest-rate exposure, refinancing capacity and the company’s continued ability to meet covenants while funding investment and buybacks.
- Actual capital spending, cash generation and resolution or accrual changes for the disclosed legal and environmental matters.